The Mortgage Forgiveness Debt Relief Act of 2007 is about to expire at the end of this year. Mortgage forgiveness can occur in a short sale, foreclosure, or even a loan mod if they reduce your principal. Most people think that they have to “hurry up” and make sure their short sale, loan mod or foreclosure occurs by December 31 of this year to qualify to make sure they don’t have to pay tax on the 1099 they’ll receive for any forgiven debt.
The good news is that there is talk in Washington D.C. right now about extending the Mortgage Forgiveness Act through the end of 2014. It’s included in President Obama’s recent budget proposal, so this is pretty seriously being considered. The bad news is that the Act doesn’t do what everyone seems to think it does. It is not a blanket exclusion where any forgiven debt is tax-free. As I read the IRS tax regulations, even when the Act is in place, it still doesn’t cover money you took out of the home and spent somewhere else. What it does cover is money used to buy, build or substantially improve a principal residence (which means this is NOT for investors). As I understand it, the Act was closing a loophole where some people had refinanced their loans, taken NO cash out, but were going to be taxed on the forgiven debt just because they had refinanced their loan, which didn’t seem fair.
Even if the Act expires, there are still other exemptions in the tax rules that will cover many people, specifically insolvency (when your debts exceed your assets) and if your loan was used to buy, build or improve your residence. For most of my clients who are facing a short sale or foreclosure, they appear to qualify for one of these exclusions.
I AM NOT A TAX EXPERT AND THE ABOVE INFO WAS NOT VERIFIED. CONSULT A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION. If you have questions on any other real estate topic, call me at (925) 240-MOVE (6683). To search the MLS for free and view virtual tours of homes for sale, go to: www.SharpHomesOnline.com. Sharp Realty